Too legit, too legit to quit

Napster, the wildly popular, and controversial, music file sharing service is still fighting some legal battles over copyright infringement, but even as its courthouse squabbles make headlines, it is preparing to sing a new tune this summer.

That's when the company has said it will unveil its new monthly subscription service with partner Bertlesmann AG's Bertlesmann E-Commerce Group, coming to market with something few dot-coms have at launch-a big brand awareness among consumers.

"Napster has a leg up because they have the most recognizable brand," said Bill Flanagan, VP-editorial director at VH1.

That's good news for Napster because the once-dominant online music service isn't yet showing any signs of gearing up its marketing machine. "To be honest, I haven't heard of anyone talking about marketing yet," said a Napster spokeswoman. A BMG spokeswoman declined comment.

Maybe Napster isn't worrying about marketing because it doesn't have to. There is so much buzz about it-with some Internet outlets doing almost daily coverage for nearly a year-employing an ad campaign might not be necessary.

OTHERS THROW HAT IN ARENA

But by summer, Napster will have plenty of company in the online music arena. In the past few weeks, at least three different Internet music retailing initiatives-MTVi and RioPort.com, Real Networks with MusicNet and Duet.com-all backed by some or all five major record labels-have announced big subscription services to be launched as early as this summer.

It's doubtful that any of these services will be as comprehensive as the original version of Napster, but they're all serious about capturing some of the service's marketshare. Music executives say the deals were a direct result of the recent Congressional committee hearings about whether Napster was infringing on the labels' copyrights. (It was.) In those hearings, it was suggested that record labels were dragging their feet in allowing independent online retailers to get unimpeded distribution of the songs they own.

Still, Napster will be the force to reckon with even if the company doesn't, as music analysts believe it will, spend much of the $70 million that BMG will use to fuel the venture on marketing. As many as 62 million unique users have downloaded the software, and now the trick is to make those users believe the service is worth paying for.

Initial estimates are that a small fraction-roughly 1 million-of those 62 million users will initially pay for the subscription service, at a price that industry executives peg at anywhere from $2.95 to $4.95 a month.

However, even if much of the user base fades, the service will finally give Napster a legitimate business model. Napster has been telling analysts that it conservatively expects to have two million paid users by the end of this year, which could reap up to $119 million in revenue. It projects that in the fifth year of operation it will have six million members, booking some $356 million. Those projections are based on a $4.95 per month unlimited use charge.

Analysts who track online music believe that to begin the conversion, Napster may revert to its old model in a sense, offering free trials. "[Its initial marketing] will probably come in the form of, say, a free 45-day trial, said Ric Dube, music Internet analyst for Webnoize, a Stoneham, Mass.-based music Internet consultancy. "They can't limp out of the gate."

But additional revenue streams that Napster might pursue present problems. The company has already offered record labels a collective $1 billion to be able to work with them, but so far only BMG has signed.

The company could also augment its offering with advertising. Using advertising as a primary source of revenue would have perhaps kept its big user base in tow, according to music executives. But those models-even by the most optimistic of standards-cannot now support such a service alone.

COMMERCIAL VENTURE

Chris Stephenson, senior VP-marketing for House of Blues Entertainment, describes it this way: "If you get say 5 million unique visitors a month, this means about 15 million page views, approximately. At a $10 CPM [cost per thousand], that gives you about $150,000 a month, maybe $200,000. That's nothing." By Stephenson's estimates that works out to about $2.4 million in annual revenue.

Still, Napster's legal troubles in offering music for free mean that the downloading of music will become a more commercial venture no matter the kinks in the business model. "Music is going to be available online-but everything is going to be available online," said Bill Flanagan, VP-editorial director of VH1. "Then it's just a matter in figuring out the bill. How long it is going to be for the telephone company or AOL to send a bill? And on it will be how many songs you have downloaded."